You have been asked to evaluate the proposed acquisition of a new clinical laboratory test system. The system’s price is $50,000 and it will cost another $10,000 for transportation and installation. The system is expected to be sold after 3 years because the laboratory is being moved at that time. The best estimate of the system’s salvage value after 3 years of use is $20,000. The system will have no impact on volume or reimbursement (and hence revenues), but it is expected to save $20,000 per year in operating costs. The not for profit businesses’s corporate cost of capital is 10%, and the standard risk adjustment is percentage points.

1. What is the project’s net investment outlay at year 0?
2. What are the project’s operating cash flows in years 1,2, and 3
3. What is the terminal cash flow at the end of year 3?
4. If the project has average risk, is it expected to be profitable?
5. What if the project is judged to have lower than average risk? Higher than average risk?